After spending decades building your RRSP, it can feel strange to start thinking about drawing it down. You’ve spent years trying to contribute regularly, pick the highest quality stocks, leave your investments alone and give them as much time as possible to grow and compound.
But the point of building that account was always to help fund your retirement. And if you want the money to last, deciding how to take it out deserves just as much thought as deciding which stocks to buy along the way.
The good news is that drawing down your RRSP doesn’t mean selling everything and moving to cash the day you retire. In fact, you’ll often want to do almost the opposite and keep much of your portfolio invested for the years ahead.
That’s why this is such an important stage. Everyone has different considerations, budgets and preferences. And while there are rules and limitations to follow, you still have a lot of choice and freedom about when to withdraw money, how much you actually need to spend and which investments you want to keep owning.
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When should you start withdrawing from your RRSP?
Because RRSP withdrawals are taxable, it’s tempting to leave the account untouched for as long as possible. However, your income and tax rate may change considerably throughout retirement.
For example, if you retire before you begin collecting Canada Pension Plan (CPP) and Old Age Security (OAS), you may have a few years when your income is lower than it was while you were working. Withdrawing some RRSP money during those years could make more sense than waiting until CPP, OAS and other retirement income are all coming in.
In addition to deciding when and how much to withdraw, you’ll also need to decide what to do with your RRSP by the end of the year you turn 71.
For many Canadians, the popular choice is to transfer their investments into a registered retirement income fund (RRIF). That allows the investments to remain in a registered account, but minimum withdrawals begin the following year.
So, drawing down your RRSP wisely doesn’t necessarily mean taking out as little as possible every year. If you have lower-income years early in retirement, using some of that room could help you avoid taking larger taxable withdrawals later.
Your investments can keep working after you retire
The other thing to remember is that money withdrawn from your RRSP or RRIF isn’t necessarily money you have to spend.
If your RRIF requires you to withdraw more than you need for living expenses, you’ll still owe tax on the withdrawal. But after covering that tax bill, you can invest the money you don’t need in a TFSA if you have contribution room.
You don’t always have to sell your investments to make an RRIF withdrawal, either. Depending on your financial institution, if you still want to own a particular stock, you may be able to have the shares moved out of the account, although their fair market value will still count as a taxable withdrawal.
Meanwhile, the investments left inside your RRIF can keep growing and generating income. So, while it can make sense to lower your portfolio’s risk and keep additional cash available for upcoming expenses, your capital can continue working for you.
That way, you can continue owning reliable dividend growth stocks like Enbridge (TSX: ENB) well into retirement. Enbridge is one of the most popular dividend stocks for Canadian investors because its pipelines and gas utilities generate relatively predictable cash flow to support its dividend, while new projects give it room to grow and continue paying you more over time.
So, while retirement often means shifting more of your portfolio towards reliable income stocks like Enbridge, bonds and other income investments, choosing what to own is only part of the job.
With withdrawal requirements to follow, planning around your taxes and budget becomes just as important.
You spent years building your RRSP so it could support you in retirement. Don’t give back more of those gains than necessary through poor tax planning. Drawing it down wisely means using it to pay for your life now while keeping high-quality investments like Enbridge working for the years ahead.
